Lagos — During the 1960s, the Nigerian economy was driven by the non-oil sector, especially the agricultural sector, with an average contribution of about 70 per cent to non oil GDP. The agricultural sector was vibrant and Nigeria was self sufficient in food and was a major exporter of agricultural products, notably cocoa, groundnuts, palm kernel and rubber, among others. The oil boom of the 1970s and 80s, followed by the excessive appreciation of the exchange rate reduced agricultural competitiveness and encouraged rent seeking behaviour in the economy.

Agriculture declined in importance from 41.3 per cent of GDP in the 1970s to 20.6 per cent in the 1980s. Its contribution to GDP in the last five years averaged 5.6 per cent. The sector contributed about 65 per cent of total employment in the 1970s and 80s. The Nigerian economy, therefore witnessed a prolonged economic stagnation, rising poverty levels and decay in infrastructure. The United Nations Human Development Indicators were low compared with those of other developing countries, e.g Indonesia, Malaysia, that were at the same level of development as Nigeria in the early 1960s. Effective public expenditure management was also undermined by widespread corruption.

Since the early 1970s the Nigerian economy has become more reliant on oil earnings, with a negative impact on the non oil sector of the economy, resulting in the non oil sector's declining contribution to GDP. Over the period of 1992 to 2002, growth in GDP averaged 2.25 per cent, with an estimated population growth rate of 2.8 per cent per annum. This has resulted in contraction in per capita income. The gravity of the situation was made much worse by the high rates of inflation recorded (an average of 28.5 per cent) during the period.

Since 2003, however, Nigeria has begun to address, systematically the problem that has been addressed as resource curse. A number of key measures are being put in place to manage oil the revenue and expenditure more effectively, in order to cushion unanticipated boom and bust cycles caused by oil prices. These measures are captured in an overall economic reform agenda that has resulted in boosting confidence, credibility, transparency and accountability, the rule of law and corporate governance in Nigeria. The results are beginning to show already. Between 2002 and 2006, the non oil sector's contribution to GDP rebounded to 7.2 per cent, from an average of 2.4 per cent between 1992 and 1998; and 3.8 per cent between 1999 and 2001, compared with oil sector's contribution of 3.9 per cent. The overall growth in GDP averaged 6.0 per cent for the period. Inflation and exchange rates moderated, with the latter achieving convergence among the three key segments of the market - official, interbank and bureaux de change. The attainment of macroeconomic stability has provided a platform for improved growth performance in recent years.

It is perhaps important to point out that Nigeria is not alone in exhibiting this pattern of development as a natural resource exporter. From 1965 to 1998, per capita GNP growth was on average -1 per cent per annum in Iran and Venezuela, -2 per cent in Libya, -3 per cent in Iraq and Kuwait, and -6 per cent in Qatar (1970 to 1995). Thus the pattern has been the same for six members of the Oil Producing Exporting Countries (OPEC). For the OPEC members as a whole, GNP per capita decreased by 1.3 per cent per annum on average between 1965 and 1998, compared with 2.2 per cent average per capita income growth in all lower- and middle-income countries during the same period.

The above evidence also reflects a consistent pattern across countries endowed with natural resources. For instance, out of 65 countries that can be classified as natural resource rich, only four (4) managed to attain both a long-term investment exceeding 25 per cent of GDP on average from 1970 to 1998, equal to that of various successful industrial countries lacking in raw materials, and per capita GNP growth exceeding 4 per cent per annum, on average, over the same period. The four (4) countries are Botswana, Indonesia, Malaysia and Thailand. An interesting question is that are there any abiding lessons for Nigeria from the experience of these four countries that were able to unshackle themselves from the natural resource curse early enough?

Lifting the Curse

The beginning of lifting the curse for any resource rich (oil producing) country is the realization that the revenue bonanza should not be used to increase current consumption but as a spring board to economic development through boosting real living standards, by financing higher levels of investments and core public goods, like massive infrastructure. The starting point for managing oil wealth lies in a long term national development strategy predicated on stimulating both public and private investment.

Nigeria's effort to break away from the manacle of the resource curse, essentially began in 2003 with the unveiling of a home-grown, reform agenda, titled the "National Economic Empowerment and Development Strategy" (NEEDS).

Macroeconomic Reforms: The major objective of the macroeconomic reform was to entrench stability in the Nigerian economy, to improve the budgetary process and fiscal prudence, in order to provide a platform for sustained economic growth. Growth has averaged 6.7 in the last five years (2002 - 2006), with the non oil sector recently accounting for a higher element of this growth. Inflation has become moderate and stability in the exchange rate was also achieved.

Fiscal Policy Reforms: The most important element here was to de-link public expenditures from oil revenue volatility by the introduction of the fiscal oil price rule that benchmarks budget provisions to an oil price rule. Under the reform, an oil price benchmark was introduced in which oil revenues above the benchmark price were saved into an excess crude account (Excess Crude Account). The objective of the excess crude oil account is to protect planned budgets against shortfall due to volatile oil prices and smoothen government spending, so as to ensure greater macroeconomic stability and maximum efficiency of investment in development projects. With the adoption of this rule, government expenditures have been de-linked from oil revenue earnings, thereby limiting the transmission of external shocks into the domestic economy. There was also a determined improvement in the government's fiscal balance over the last five years, with an average deficit of 3 per cent of GDP, with concrete plans to reduce the deficit to GDP ratio to around 1 per cent by 2010. Funds in the excess crude account totalled US$6.35 billion in 2004, grew to US$17.68 billion in 2005; US$17.3 billion in 2006.

Over the period 2004 to 2006, foreign reserves rose from US$17 billion at end-December 2004 to US$42.3 billion in 2006. It is worth noting that the constitutional provision regarding excess crude account stipulates that all revenue accruing from the sales of crude oil should be shared among the three tiers of government. So the savings in the Excess Crude account are being challenged legally by the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC). This is one of the key risks to the reform agenda.

Budgetary Reforms: To improve the efficiency of government spending, the budgetary process under -went significant reforms. Currently, a fiscal strategy that encompasses a medium-term review of all the underlying elements and key assumptions of the budget and fiscal risks is being implemented. Under this strategy, medium term revenue and expenditure frameworks and medium term sector strategies have been introduced, in order to ensure that spending programmes adequately reflect government priorities.

Monetary Policy Reforms: Similarly, monetary policy implementation has been on course, with the Central Bank of Nigeria (CBN) strictly adhering to achieving set monetary targets through the use of monetary instruments and its standing deposit and lending corridor, the CBN has been able to smoothen interbank interest rates. The inflation rate also has been brought down and kept at single digit in 2006. Another key achievement is the convergence of the exchange rates among the three segments of the markets official, interbank and bureaux de change segments of the market. Inflation expectations have also been reduced significantly. These achievements have helped to bolster capital market activities significantly, reinforced by the capital inflows into the market. The achieved, better coordination between fiscal and monetary policies also has provided a stable macroeconomic environment for growth.

Debt Management Reforms: Improvements in debt management were vigorously implemented. The total foreign debt owed by Nigeria was drastically reduced, with the exit from the Paris and London clubs debts, from US$ 35.9 billion in 2004 to US$3.5 million by end 2006. This brought down Nigerian debt from about 74.8 per cent of GDP in 2003 to 3.5 per cent of GDP in 2006. Domestic debt has been restructured through the issuance of long term government bonds in the Nigeria's capital market, which are being properly and regularly serviced.

The resources freed from the debt exit are being applied towards achieving the Millennium Development Goals (MDGs) by 2015 through annual budgetary allocation. The disbursement and monitoring of such funds directed at the achievement of the MDGs is being coordinated by a special office created for the purpose under the Presidency.

Banking and Financial Sector Reforms: The banking sector reform was aimed at strengthening the Nigerian banks in order to become world class players in financial service delivery. Prior to the reforms, the sector was characterized by lopsided and oligopolistic, a situation that did not allow for fair competition, as a few banks dominated the market share. The Central Bank of Nigeria (CBN) requested in 2004 that all banks should each raise their paid-up capital from US$15 million to US192 million by 31st December 2005. Thereafter, the banking sector in Nigeria underwent a process of consolidation, which brought the number of banks from 89, pre-consolidation, to 25 post-consolidation. The capital base of the consolidated banks rose to $5.9 billion compared with $3 billion before consolidation. The banking reform attracted huge capital inflows from within and abroad. It is estimated that the Nigerian banks raised about US$3 billion from the domestic capital market and attracted about US$600 million of FDIs into Nigeria.

Other Sectoral Reforms: Prudent public expenditure management was instituted through the publication on a monthly basis of all revenue shared to the three tiers of government. The aim is to improve transparency and accountability by the respective tiers of government to their citizenry.

Other fiscal reforms include the passage into law of the Bureau for Public Procurement Act and the Fiscal Responsibility Bill, which are aimed at improving fiscal transparency; due process and accountability in government finances. Nigeria is also one of the few oil producing countries to adopt and implement the Extractive Industries Transparency Initiatives (EITI) to help improve corporate governance in the sector. One of the aims of the Nigerian Extractive Industry Transparency Initiative (NEITI) was to monitor the consistency of oil revenues to production quotas through an audit of the sector. The first such audit was undertaken in 2004. Arrangements are in top gear also to undertake the second NEITI audit.

The establishment of the Economic and Financial Crime commission (EFCC) and the Independent Corrupt Practices Commission (ICPC) were all geared towards curbing corruption and malpractices in both the public and private sectors of the economy. In the past Nigeria was categorized as one of the most corrupt nations by Transparency International. The activities of corrupt officials and 419 operators hindered the realization of potential investment opportunities to the country and put Nigeria at disadvantage. The activities of the EFCC, the anti corruption commission, have been remarkable, for example about 400 cases are being prosecuted; 91 court convictions have been obtained for various charges and assets worth over US$5billion have been recovered. Importantly also, such prosecution and convictions have included top government officials.

Another landmark achievement is in the area of pension reforms, which have brought resources for long term investment in the economy. The Pension Commission in Nigeria had presently as asset base of over US$5.0 billion in 2006.

To compliment all these reforms, are the institutional reforms that were geared towards achieving efficiency and streamlining government operations for better service delivery. For example the Federal Inland Revenue Services and Nigerian Customs Service, are undergoing comprehensive reforms that are geared towards achieving massive efficiency gains. The tax structure is being overhauled to improve revenue collection by the agencies, especially of non-oil revenues.

For the first time also, Nigeria received a sovereign rating of BB- by two leading international rating agencies, Fitch Ratings and Standard & Poor's. Nigeria's BB-.ratings puts her at par with a number of key emerging economies.

Conclusion

The resource curse is real, as evidence from various studies has attested to the fact that, the economic performance of oil producing nations has fallen below expectations compared with non resource - endowed nations. This paper has tried to figure out why Nigeria did not develop for over four decades and the transformation that is taking place there, presently, which is envisaged to lift the nation from the resource curse off the nation.

Some of the reasons why Nigeria could not exorcise itself from the dilemma of resource curse earlier were political instability, lack of good governance, corruption and disrespect for the rule of law, worsened by frequent military interventions in governance through coups.

The national economic development aspiration has remained that of altering the structure of production and consumption activities so as to diversify the economic base and reduce dependence on oil revenues, in a bid to return the economy to the path of self-sustaining growth and industrialization. Nigeria is a country with abundant human and natural resources, it is the 8th largest producer of oil and has the 6th world largest deposit of gas. Its 140 million population is made up largely of youths, with great potentials. Its arable land is virtually under utilized. If these resources are well managed, Nigeria will surely become one of the world's top 20 nations by the year 2020.

- Excerpted from the paper presented by Dr. Usman (OFR), Hon. Minister of Finance, at the London School of Economics and Political Science last week.